Iceland’s Way ANS

This is interesting.  The government promised to pay off the loans, but the people voted against doing it -- twice!  And they are recovering faster than the countries that took on the banks' gambling debts. 
Find it here:  http://www.nytimes.com/2011/04/19/opinion/19tue2.html?_r=2&ref=opinion  
--Kim

Editorial

Iceland's Way

Published: April 18, 2011

 

In the go-go years leading up to the financial crisis, Iceland's banks were hugely irresponsible, luring foreign depositors with high interest rates and putting the money into risky loans. When Iceland's big banks went under in 2008, they were 10 times as big as the country's economy.

The government of Iceland failed to rein in bankers' excesses. But its refusal to take on bank debts, forcing creditors to take losses and share in the pain, looks increasingly smart as Iceland's economy begins to recover.

The European Union and the International Monetary Fund ­ their bailouts of Greece and Ireland were designed to make creditors whole ­ should learn from Iceland's example. As they negotiate a rescue for Portugal, they should realize that taxpayers cannot bear the entire cost of the banks' misdeeds.

The government of Iceland wasn't intentionally daring or smarter than others. It couldn't afford to bail out its banks, so it let them fail. It transferred domestic deposits and loans, at a discount, into new banks, with some $2 billion in money from taxpayers. And it left the banks' foreign assets and foreign debts behind. Some foreign creditors could get as little as 27 cents on the euro.

Britain and the Netherlands have pushed Iceland to cover about $5.8 billion lost by British and Dutch depositors when the bank Landsbanki went belly up in 2008. (The British and Dutch governments reimbursed their citizens in anticipation of Iceland paying up.)

Iceland twice agreed to those demands, despite the fact that the amount is about 45 percent of its gross domestic product. Iceland's taxpayers refused to go along. In a referendum last week, voters rejected a deal for the second time.

Iceland has felt considerable pain. Its currency lost half of its value against the euro in 2008. A $2 billion loan from the I.M.F. managed to stave off a complete meltdown, but the economy still shrank 7 percent in 2009 and the unemployment rate quadrupled. Government debt is expected to peak at about 100 percent of G.D.P. this year ­ up from 42 percent three years ago.

Britain and the Netherlands are suing Iceland before the court of the European Free Trade Association for failure to pay its debts. And there is talk in London and The Hague about further punishment, including possibly stalling Iceland's application to join the European Union.

Still, it is pulling through. The I.M.F. expects it to grow 2.5 percent this year. Unemployment is falling. Compare its case to Ireland, where the government put the banks' debts on the shoulders of taxpayers. Its economy shrank at least as much as Iceland's, and it is recovering more slowly. The I.M.F. expects Ireland's debt to peak at 125 percent of G.D.P. in two years. That looks optimistic.

As investors recover confidence, insurance on Icelandic government debt is cheaper than that on debt from Ireland, Greece or Portugal.

A version of this editorial appeared in print on April 19, 2011, on page A24 of the New York edition with the headline: Iceland's Way: Its taxpayers refuse to cover bank losses, and the country may come out ahead.